Apple’s iPhone vs Smartphone Software Makers

March 7th, 2008

Daniel Eran DilgerIn the smartphone business, Apple is like a Microsoft combined with a Motorola and a RIM; it makes money on software, hardware, and services. It also makes money at retail and with accessories, and software and media sales, and earns money back from its service partners. Other hardware makers can’t compete with Apple in all these areas because they’re all fixed into position as pawns of the mobile providers.

But what about pure software makers? Will Microsoft or Google or the open source community deliver a good enough equivalent version of the iPhones’ software features to enable generic hardware makers to catch up in the same way that Microsoft ported Apple’s unpatented Mac technology to the PC in the late 80s? Here’s a look at the threats posed by rival smartphone software makers, and how well the iPhone will be able to compete against them.

Windows Mobile vs the iPhone.
Microsoft has been desperately working to duplicate its Windows PC monopoly among PDA and phone makers, but after ten years of investing in WinCE development, it’s found nothing but extreme failure, with regular annual losses counting into the billions. Its Windows Mobile business has been passed up by RIM and Apple, both of which only entered the phone business recently. Why couldn’t Microsoft make its PC model work in the handheld devices market?

For starters, Microsoft can only make money on software licensing, which extracts a fee from its partners’ manufacturing profits. Apple earns the entire manufacturing profit with the iPhone. Last year, Apple made a third of Microsoft’s revenue and a quarter of its profits despite only having a roughly 5% share of the PC market. Clearly, there’s big money in hardware.

Microsoft isn’t getting any of that as a software licensing outfit. It also earns nothing from Apple’s other smartphone profit centers: retail profits, service revenue shares, accessory sales, and software and media sales. While Apple is successfully expanding its business into software, Microsoft has been unable to make money in the consumer electronics hardware business.

Monopolizing the Market.The only way Microsoft can compete as a software-only company is by monopolizing the market. In the PC world, Microsoft successfully thwarted the development of rival PC operating systems, enabling it to corner the market and provide the only software product that PC makers could license in order to offer machines that could run existing applications.

Microsoft used its relationship with IBM to spread its MS-DOS platform in the 80s, then pulled the rug out from under its OS/2 partnership with IBM while blocking the development and sale of alternative DOS distributions in order to establish Windows in the 90s. Once that happened, the DOS PC platform was weaned onto the Windows PC platform, and PC makers were left with only one operating system to license and no rival options that could run the Windows software that Microsoft had established. The PC makers also signed exclusive licensing contracts with Microsoft that prevented any new rivals from finding a market.

This model worked well for Microsoft through the 90s. However, particularly since 2001, Microsoft has had trouble keeping up with Apple’s Mac OS X development, particularly in the consumer space. Apple’s tight hardware and software integration has enabled the company to deliver a differentiated product that can move faster, eschew Microsoft’s legacy limitations and security flaws, and deliver new hardware features in ways Microsoft can’t, because Microsoft can’t force hardware makers to follow its plans. These factors are not only eroding Microsoft’s monopoly position in PCs, but have also worked to prevent its monopolization of new markets.

The Failure of Windows Media.Microsoft’s parallel efforts to monopolize the software side of portable music and video devices received a lot of media attention, but didn’t spark with consumers. Microsoft’s Media2Go, followed by PlaysForSure, also managed to assemble lots of hardware partners, but Microsoft was both slow to deliver the technology it promised and ran into complications related to getting its software to work well across different hardware models created by independent manufacturers and independent media stores licensing Microsoft’s Windows Media DRM.

Apple’s slick integration with the iPod and iTunes quickly tore apart any hopes for a PC-style monopolization of the mobile media market with PlaysForSure. Microsoft’s more recent attempt to duplicate the iPod with its own music player also failed miserably, and further unraveled its struggling PlaysForSure partnerships. Any effort by Microsoft to create a standalone iPhone competitor could only similarly kill the remains of its Windows Smartphone partnerships.

The Failure of Windows Mobile.Like smartphone hardware makers, Microsoft is locked into a profitless position in software that looks more like a charity than a business. It has little room to move as it watches the iPhone tear up the market it has tended for a decade in just a few months. The company has responded by advertising future plans to match some iPhone software features several years from now in a new Windows Mobile release, but those changes won’t make any difference because Microsoft isn’t just failing in software; it also lacks any sustainable ongoing business plan for building a desirable platform, a supporting ecosystem, and a retail engine that can compete against the iPhone and iPod Touch.

Microsoft recently gave its failing WinCE and Windows Smartphone software team the final insult by purchasing Danger, a smartphone development group that built the custom SideKick phone for T-Mobile. That product is nearly as long in the tooth as WinCE/Windows Mobile in terms of offering a modern smartphone platform. Perhaps it could have impressed John Dvorak a year ago, back when he was observing that buyers were all looking for big clunky phone devices with chicklet keyboards, but it’s no match for the iPhone.

If there is any excitement left in Danger, the appointment of Roz Ho to lead the acquired Danger team–the same black hole of enthusiasm who led years of yawn-worthy development of Office for Mac at Microsoft–defuses any hope for the future. No amount of focus groups or committee meetings are going to turn Danger into an iPhone. Further, merging Danger into WinCE makes as much sense as Microsoft buying Yahoo’s properties and converting them to run on NT.

RIM, which also has its own OS and competes directly against Microsoft in the enterprise email market?

LiMo members Motorola, NEC, NTT DoCoMo, Panasonic, Samsung and Vodafone, which have established a preference for using Linux for free (as in beer, not as in speech)?

Palm, which is quickly headed toward irrelevance and also leaning toward Linux with Access?

Microsoft has WinCE licensing relationships with a variety of manufacturers, but none of them have signed up exclusively to only sell Windows Mobile devices in the pattern of PC makers. There is simply no equivalent to the PC market among smartphone manufacturers, begging Microsoft for a software stack to enable them to compete against Apple’s technology. There is also no reason for hardware manufacturers to give up their own software independence as users of Symbian, Linux, or an internal custom platform in order to become dependent upon Microsoft.

Any who are tempted to do so would have to consider the fall of Palm over the last few years, which attempted to add Windows Mobile offerings to its product lineup. That not only killed off its own Palm OS platform, but also reduced its ability to compete; Microsoft couldn’t provide software that matched all of the capabilities of Palm’s own software, and left Palm to build its hardware around Windows Mobile instead of allowing Palm to differentiate itself. Offering Windows Mobile on its Palm hardware has also done nothing to reverse Palm’s sales slide. There is simply no upside to partnering with Microsoft in Windows Mobile.

That offers a bleak outlook for the future of Windows Mobile. Without a majority market share, the factors that colluded to hand Microsoft a monopoly position in PCs will not materialize in the phone market. Outside the US, the phone market is largely based upon Symbian, and in the US, Microsoft’s weak lead has been smashed by RIM and the rapid expansion of the iPhone.

Apple has not only exceeded quarterly sales of new Windows Mobile phones in Microsoft’s strongest market, but has also overwhelmed the installed base Microsoft’s platform on the web by claiming 71% of all mobile web traffic, despite a half decade lead by Microsoft in selling Windows Smartphones. CEO Steve Ballmer was apparently completely unaware of the iPhone’s potential last year, when he scoffed that Apple wouldn’t take more than two or three percent of the market.

No Country For Old Windows.Windows Mobile is clearly not duplicating the lucky timing and sly advance of the Windows PC. There is no overwhelming standardization upon Windows Mobile software, no piracy market equivalent to entrench Windows Mobile as the standard OS for generic phones, and no real benefit to using Windows Mobile, either for users or manufacturers. The only group with any interest in Windows Mobile are the Windows Enthusiast pundits who have built their careers upon recommending Microsoft’s products. Even among them, many are loathe to say anything to positive about Windows Mobile.

When I suggested that Mike Elgan supported Windows Mobile as an anti-iPhone shill, he asked me specifically to note that he has never advocated or recommended the WinCE/Windows Mobile platform. Those that do froth over the benefits of Windows Mobile, in particular analysts with the pro-Microsoft Gartner Group, have made less than honest and upfront comparisons of its Enterprise advantages over the iPhone.

They’ve been forced to fudge in describing future features of Windows Mobile that weren’t even available at the time they made their Enterprise superiority claims. The majority of the installed base of Windows Mobile users still have no access to those supposed security features, including remote wiping of Flash RAM, which are supposed to keep IT staff bound to and satisfied by Microsoft’s platform. Why develop for a proprietary mobile platform on the rocks when the open web makes targeting the iPhone no more difficult than reaching the rest of the full, open, and standards-based Internet?

Apple’s new Cocoa Touch Xcode development tools for the iPhone are far in advance of anything in Windows Mobile. As one developer looking at Microsoft’s Windows Embedded CE 6.0 platform builder and Visual Studio 2005 observed:

“CE is both really clunky and so deeply invested in the Win32 API’s that despite all the checkboxes to turn pieces on and off, it really only seems suited for building something that’s going to run Win32 or .NET apps. The ‘Hello World’ subproject I added literally gave me flashbacks of reading old editions of the Petzold Programming Windows books. It would be as if Apple released their iPhone SDK and the sample programs looked like sample Pascal code from Inside the Macintosh, Vol. 1, instead of using Cocoa.”

This contrasts sharply with the accolades gushed by developers looking at the iPhone’s new SDK.

Paranoid About Android.Google has been identified as the next in line to destroy the advance of the iPhone. Some have suggested Google’s Android project would create a rival gPhone that would accomplish what Microsoft did to the PC in the smartphone arena. The difference is that Google isn’t a software company; it’s a services company.

Google hopes to sell software someday, but its revenues come from positioning advertising to monetize its search technology. Google sells page views, not code. Android is not a proprietary platform that will enrich Google with licensing revenue in the same manner as licensing Windows for the PC made Microsoft rich. Android is an open source partnership designed to prevent the need for smartphone developers to license Windows Mobile.

Google aims to have Android usurp the position of Windows Mobile and exist as a standardized platform for manufacturers to use at a low cost. Google isn’t doing this to earn a fraction of manufacturer’s profits in software licensing as Microsoft is, but rather to establish an open platform Google can use to push its services. It plans to provide services to manufacturers that will result in Google gaining a mobile audience of end users, and then resell these page views to advertisers.

Google and the iPhone.Google doesn’t have to take on the iPhone because it isn’t a threat to its Android platform or services business. In fact, the iPhone is doing exactly what Google wants: it’s presenting users with easy access to its mapping and search technologies and allowing Google to present relevant ads to web browsers. Android is designed to expand the iPhone experience to phones from other makers at Microsoft’s expense.

Will this expansion eventually be a problem for Apple? That’s unlikely, as long as Apple maintains progressive development of its own platform. Android has yet to get off the ground, but when it does, it will battle with Windows Mobile for the attention of third party phone makers. Google’s advantage is cost: it can offer Android for nothing and allow manufacturers to customize the open software platform to suit their needs. That’s a devastating blow to the business model of Windows Mobile.

However, the cheapness of Android will also prevent it from being a direct competitor to the iPhone. Apple’s WiFi mobile platform benefits from the direct profitability of Apple’s hardware sales. As the company invests in building its slick user interface, polishing integration with iTunes, and adds new partnerships with retailers in the pattern of Starbucks, the iPhone will become increasingly difficult to duplicate. Again, nobody copied the iPod successfully in eight years, so the chances that Apple’s more complex WiFi mobile platform of the iPhone and iPod Touch will be cloned are even more remote.

Even if Google’s Android became the lingua franca of smartphones, it would still pose little threat to the iPhone in the same way that Linux and BSD pose little threat to Mac OS X; they serve different users with different needs. The iPhone also poses no threat to Android or Google, because it already does what Google hopes to accomplish with Android. Unlike Microsoft, Apple isn’t working to displace Google in search or in online advertising.

In contrast, the Mac platform was a direct threat to Microsoft in establishing a monopoly position in Windows, resulting in Microsoft working hard to make the Mac irrelevant by withholding development of Mac Office from 1994 to 1998, dropping Mac applications including Project, and pushing third parties to develop exclusively for Windows.

Linux and Open Source: OpenMoko.Another project fancifully touted as an iPhone-killer in the press was OpenMoko, an project started by phone manufacturer FIC in order to develop a hobbyist-friendly, open smartphone development platform.

Like Android, OpenMoko was really an alternative to Windows Mobile, designed essentially to run on phones built around Microsoft’s WinCE reference hardware plans. Interest in OpenMoko has waned following the release of the iPhone, because the iPhone offers advantages both in hardware and in economies of scale.

The tinker-centric attraction of OpenMoko partially overlapped with its Linux-oriented, GNU-style software ideology, but many who were drawn to the concept of an extensible, non-Microsoft smartphone were not necessarily GNU advocates. Even among those who were, the reality of slow volunteer community development and the hardware constraints posed by having to work in the shadow of FIC’s commercial efforts have left the project with half empty sails of enthusiasm.

Commercial Linux Platforms.Other open source projects have fared similarly. Motorola’s use of Linux, which constitutes the majority of open source based phones, isn’t really even open. Those phones are mostly sold in China, lack any real GNU-style software freedom for developers or users, and largely use Linux because it is freely available, not because of any interest in promoting open development.

Other Linux phone distros, including Access‘ (formerly PalmSource) plans for a Palm OS replacement, haven’t really caught on in smartphone use. Trolltech’s Qtopia GreenPhone has gone nowhere since its announcement in 2001. Nokia recently purchased the company and plans to use its technology to shore up its plans for future mobile devices. Other open source consortiums, including LIPS and LiMo, appear to be working in parallel with or have been overshadowed by Google’s Android.

Open source works well at offering alternatives to proprietary, commercial products and technologies, but as yet there are few examples of hardware makers using Linux to take over new markets, particularly where tight hardware and software integration is important. Linux has even had a hard time competing against Windows on the desktop PC, which is one of the most ideal uses for Linux. In embedded applications, the use of Linux is often wrapped in so many layers of proprietary hardware that it begins to offer no real advantage over a custom designed system like the iPhone.

Mac OS X vs Linux on the iPhone and Mobile DevicesMac OS X vs Linux: Third Party Software and Security
Freedom’s Just Another Word For Nothing Left to Earn.OpenMoko, for example, can only be run on an FIC phone, while Motorola’s Linux can only run on that company’s phones. Many parts of a smartphone can’t run open software by law, including the baseband processor. This is restricted to prevent tinkers from creating easy to hack together mobile signal disrupters. While open software is a pleasant sounding idea, hackable software on an embedded device that needs to “just work” is not the best application of GNU ideals for most users. Even Linus Torvalds expresses a distinct lack of interest in pushing his Linux kernel into mobile phone applications.

The result: the iPhone will find an audience among hackers who want to develop interesting mobile applications on top of a foundation that just works. Users familiar with Linux will find the iPhone’s OS X Unix internals approachable and easy to learn. Those factors promise to outweigh the number of people worried about developing software for a platform owned by a commercial company, particularly since Apple is building a business model into iPhone software that will enable developers to sell their work.

Interest in communal living tends to rapidly wane when a business model arrives to offer something more than subsistence living. With the iPhone, Apple is embracing both open source and freeware as well as commercial application development. Apple is creating a market for even the smallest of developers that is patterned directly upon its support for indie labels in iTunes. Apple will promote their software in iTunes and the iPhone App Store for a 30% commission. If that sounds like a lot, consider that the retail markup on most software is 50%, and developers typically pay to market, package, and distribute their work from their half.

The Sun Also Sets.Last spring, Sun captured some attention by taking the OpenMoko prototype and photoshopping an iPhone-like interface on top to demonstrate that it could release something with the cachet of Apple’s headline grabbing smartphone.

Information Week pundid Alexander Wolfe decided that Sun’s so-called jPhone could rival Apple’s iPhone and somehow “beat it to the punch.” In reality, nobody has expressed any interest in paying Sun to license its JavaFX platform over the last year. The OpenMoko vehicle Sun hoped would act as its Trojan Horse into the city of “Troy to deliver a smartphone platform” ended up beaten to death itself.

Perhaps if industry titans Sun, Microsoft, Google, Motorola, and Palm are all desperately scrambling in their efforts to deliver a workable, desirable smartphone and maintain a software platform, Apple’s blockbuster sales and enthusiastic worldwide demand are a bigger deal than the mainstream tech media wants us to think.

What About Symbian?The last remaining cross-platform software effort that rivals the iPhone is Symbian. Outside the US, the majority of all phones run Symbian, including the majority of smartphones. Symbian is run as a partnership between Nokia, Sony Ericsson, NTT DoCoMo, and various other hardware makers. However, even Symbian’s leading users are aware of its shortcomings as a platform as they move into the future.

Nokia is expanding its use of Linux, which is a clear message about the usability of Symbian in more complex devices. If Symbian were a great development environment, Nokia wouldn’t have needed to buy Trolltech, and could have used Symbian to power its line of Linux-based Internet Tablets such as the N800. As Nokia moves away from Symbian, the partnership is set to fall apart.

Sony Ericsson has also announced plans to build a Windows Mobile device in the Xperia X1. While that sounds good for Windows Mobile, it says more about the future of Symbian. Once it arrives, it will be able to speak for the future of Windows Mobile, which desperately needs some good news after its trampling in the US and its long history of slow growth in overseas markets.

And Then Those Five Engines.None of the existing efforts to develop a general purpose smartphone software platform offer any really fierce challenge to the iPhone as a platform. Additionally, the iPhone is tied to Apple’s iPod juggernaut, which at 150 million units sold and counting knows no equal among handheld mobile devices. As the iPod Touch and iPhone create a WiFi mobile platform with the commercial backing of a top manufacturer with $18 billion in the bank, efforts to topple Apple’s momentum will become increasingly difficult.

That cash pile is only going to get larger as Apple profitably manufactures iPhones and iPods, markets them it its own retail stores along with software and accessory sales, and promotes them as ideal clients of iTunes media. That’s not to say there’s nothing Apple can improve upon, but there’s more for the company to take from competitors than there is for it to lose.

It will not be too difficult for Apple to provide the same kind of Enterprise messaging services of RIM’s BlackBerry, or to provide the custom development tools that caused IT shops to show interest in Palm and Windows Mobile devices. However, those markets are relatively small niches compared to Apple’s consumer iPod business and its extensive plans to fill out its offerings to education customers who already are an Apple stronghold. As the company promotes its media offerings in iTunes U, the development opportunities of the iPhone to act as a wireless mobile platform will create value that can be applied elsewhere, including Enterprise customers.

Rather than worrying about the iPhone, pundits really need to start sweating the fate of Microsoft, Symbian, RIM, and the hardware makers who rely upon their software to compete against Apple’s push into mobile devices.
[Note: this article was written before Apple announced broad initiatives to deliver Enterprise custom software development tools; remote management, deployment and termination; corporate mail and network support. When these arrive in their final form this summer, it will put even more pressure upon Windows Mobile and RIM's BlackBerry.]

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